Below is the entire #ChinaSlowing exchange between McCullough and Senior Macro analyst Darius Dale. They break down the investing implications of so-called “China currency crisis risk” and “the most epic stimulus in the history of China.”

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Subscriber #1: Is today a good day to short China?

Keith McCullough: Today is not a good day to short China.

It’s a good day when the Shanghai Composite is at the top end of its Risk Range. But if you look at the Chinese stock market, it’s down -21% from its January high. In other words, the time to be shorting China was over the last six months. Today is when you’d be booking some gains. It’s going to bounce to a lower high.

Subscriber #2: Hypothetically, if China were to devalue would it be positive or negative for the dollar?

Darius Dale: The quick answer is yes, it would be positive for the dollar.

McCullough: But there’s a larger point to be made here. The Chinese yuan is down just over a percent for the year-to-date versus the dollar. The reason why it’s not down a lot is because the Chinese have decided it’s not down a lot. It’s a soft peg. It’s unlike the Argentine Peso, the Brazilian real, the Turkish lira, and what’s happening to their capital account now.

The Chinese have a closed capital account and that is quite different than a lot of Emerging Markets and their currencies.

Dale: The problem with China devaluing is not the sudden stop, balance of payments crisis that we’ve seen historically in Emerging Markets, most recently from 2011-2015. That’s not China’s problem.

China’s problem is the myriad investors on the mainland who are concerned about a material devaluation and will find very creative ways to get their money out, much like we saw in late 2015, when China revalued the peg to the mid-point of the market rate.

That is always China’s biggest fear, that they destabilize domestic financial and capital markets as wealthy Chinese investors head for the exits. It’s not sudden stop risk in the sense that international investors are plugging some current account deficit or sovereign deficit it’s more that the Chinese themselves might be fearful of some devaluation.

McCullough: A very important point. The main reason China is slowing has nothing to do with a trade war. It has to do with them having to compare with the most epic stimulus in the history of China.

If you look at slide 91 in the current Macro deck. At the same time as the Fed devalued the dollar and dropped the forward outlook (i.e. went dovish), what’s called the Shanghai Accord, People’s Bank of China medium-term lending and open market operations went as easy as they could.

McCullough: That was the biggest fiscal and monetary stimulus in the history of China. And that was ahead of Xi being appointed President for life. Now, if you look at the next chart, this is the most important chart explaining why I can make the statement that China is slowing has nothing to do with Donald Trump. It’s because they have to compare against Xi’s epic stimulus.

The Chinese stimulated big time in the secondary industries in China which is what they can centrally plan, command and control. That equated to 50% of GDP, just like they did when the globe had its major slowdown during the Financial Crisis. So again, this is why China is slowing. They have to compare against the most epic stimulus in the history of China.

I’m not saying the trade war rhetoric doesn’t matter. But the real reason we made the call on China was the cyclical call.

This is what Wall Street really needs to have their pants taken down on. They need to be accountable to this. They need to tell you why they’ve never called a cyclical slowdown ever. Pundits talk about politics and blame politics. They’re Macro Tourists.

That’s why you’ve joined us. It’s a tremendous opportunity in this business because this is when we can capitalize on a large group of people who are on the bid and ask in markets that are doing literally doing the opposite of what they should be doing.

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